This blog will try to dissect distressed debt investing, up and down the capital structure. We will look at current distressed debt situations, try to explain the ins and outs of how decisions are made in the distressed debt world, probably rant a few times about positions that are working against me, and hopefully enlighten some readers.

"With Charlie’s help, I completely reorganized the company I founded. The structure was changed into that of the early investment partnerships of Buffett and Munger (note: Buffett and Munger each had partnerships to manage their own investment portfolios) and all the shortcomings of the typical hedge funds were eliminated. Investors who stayed made long-term investment guarantees and we no longer accepted new investors.

Thus I entered another golden period in my investment career. I was no longer restricted by the various limitations of Wall Street. The numbers still fluctuate as before, but eventual result is substantial growth. From the fourth quarter of 2004 to the end of 2009, the new fund returned an annual compound growth rate of 36% after deducting operating costs. From the inception of the fund in January 1998, the fund returned an annual compound growth rate in excess of 29%. In 12 years, the capital grew more than 20 folds."

Good lord. I have seen only a few investors put up numbers like theses...one in particular comes to mind...

...achieved by Warren Buffett during the Buffet-Partnership years.

On Charlie Munger:

"When Charlie thinks about things, he starts by inverting. To understand how to be happy in life, Charlie will study how to make life miserable; to examine how business become big and strong, Charlie first studies how businesses decline and die; most people care more about how to succeed in the stock market, Charlie is most concerned about why most have failed in the stock market. His way of thinking comes from the saying in the farmer’s philosophy: I want to know is where I’m going to die, so I will never go there."

Never ever lose money - also worry about the downside and the upside will take care of itself.

The next link is from Tariq Ali's Street Capitalist, a blog I find myself reading more and more often. If you remember the last time we featured his blog was with a summary of a Li Lu lecture at Columbia. Tariq has done it again with a 2010 lecture given by Li Lu. Some more choice quotes:

From Bruce Greenwald:

Warren Buffett says that when he retires, there are three people he would like to manage his money. First is Seth Klarman of the Baupost Group, who you will hear from later in the course. Next is Greg Alexander. Third is Li Lu. He happens to manage all of Charlie Munger’s money. I have a small investment with him and in four years it is up 400%.

What a statement. And I have never heard WEB say anything about Seth Klarman - I wonder if they talk about investment ideas??

Finding an edge really only comes from a right frame of mind and years of continuous study. But when you find those insights along the road of study, you need to have the guts and courage to back up the truck and ignore the opinions of everyone else. To be a better investor, you have to stand on your own. You just can’t copy other people’s insights. Sooner or later, the position turns against you. If you don’t have any insights into the business, when it goes from $100 to $50 you aren’t going to know if it will back to $100 or $200.

So this is really difficult, but on the other hand, the rewards are huge. Warren says that if you only come up with 10 good investments in your 40 year career, you will be extraordinarily rich. That’s really what it is. This shows how different value investing is than any other subject.

I love it.

And finally, one how to evaluate businesses:

So how do you really understand and gain that great insight? Pick one business. Any business. And truly understand it. I tell my interns to work through this exercise – imagine a distant relative passes away and you find out that you have inherited 100% of a business they owned. What are you going to do about it? That is the mentality to take when looking at any business. I strongly encourage you to start and understand 1 business, inside out. That is better than any training possible. It does not have to be a great business, it could be any business. You need to be able to get a feel for how you would do as a 100% owner. If you can do that, you will have a tremendous leg up against the competition. Most people don’t take that first concept correctly and it is quite sad. People view it as a piece of paper and just trade because it is easy to trade. But if it was a business you inherited, you would not be trading. You would really seek out knowledge on how it should be run, how it works. If you start with that, you will eventually know how much that business is worth.

Posted by
Hunter

4
comments:

I'm curious about the sourcing of Greenwald's Klarman/Alexander/Lu quote. Did he hear this directly, or is he inferring it from Munger's enthusiasm? There was an interesting moment in the last Berkshire AGM where Munger mentioned that a manager had achieved 200% results without leverage, and Buffett conspicuously refused to comment.

I would suggest caution regarding Li Lu's nominal results given the lack of available information concerning his actual, as opposed to expressed, methodology. Seth Klarman proved to capital preservation with an entire decade of nominal underperformance achieved through a proselyte's commitment to margins of safety.

Much of what Lu says sounds very good, but there are plenty pretenders who, after 47 years of Berkshire Hathaway, know exactly what to say.

Hunter -- I also read Li Lu's columbia speech and picked out the quote about evaluating businesses as one of the best take aways from the article. Additionally, I thought this excerpt to be the essence of investment analysis:

"The key to analyzing it is you have to ask: do I really know what I think I know, do I really know what I don’t know? If you can’t answer that question, chances are you are gambling."

I like Li Lu's chances of succeeding Buffett as Berkshire's CIO. If Greenwald's quote is accurate that Li is managing all of Munger's money, then it's a small leap to see him managing all of Buffett's money too.

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About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.

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This website is about distressed debt investing. Under no circumstances is this an offer to sell or a solicitation to buy securities discussed on this site. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. Distressed-Debt-Investing.com, its editor and/or related parties may have positions in companies discussed. All data, information and opinions are subject to change without notice.